This article first appeared in The Edge Financial Daily on August 7, 2018
Bumi Armada Bhd
(Aug 6, 72.5 sen)
Reaffirm buy with an unchanged target price (TP) of 98 sen: Bumi Armada Bhd has signed a six-year firm bareboat charter (BBC) contract extension with Hoang Long Joint Operating Company (HLJOC) (Vietnam) for the charter of floating production storage and offloading (FPSO) Armada TGT 1, with a contract value of US$285 million (RM1.16 billion). This extension is expected to begin immediately from Aug 27, 2018, upon the expiry of the initial contract, and will last until Nov 14, 2024. TGT 1 has had a long working relationship with HLJOC over the past seven years since achieving first oil in August 2011.
Looking at the earlier arrangement (prior to securing this contract), the extension would only be done every year over an eight-year period, upon the firm contract expiry in August 2018. However, we are more positive on this new contract as it will provide longer-term visibility of TGT 1 earnings and cash flow. Based on a back-of-envelope calculation, the renewed BBC rate is estimated at US$127,232 per day, which is about 40% lower than previously. Nevertheless, as TGT 1 has been debt-free since early 2018, the net impact will be about 30% lower, which is in line with our expectations.
We maintain our “buy” call and TP of 98 sen, based on sum-of-parts valuation. We remain bullish on Bumi Armada’s outlook for the second half of 2018, underpinned by additional contributions from FPSO Olombendo and Kraken. However, we strongly believe that the next rerating catalyst lies upon the final acceptance timing of Kraken.
Key risks to our “buy” call include weaker-than-expected offshore support vessel fleet utilisation and termination of existing FPSO contracts. — Affin Hwang Capital, Aug 6